Australia: Infrastructure Joint Ventures As Cartels?

Key Points:The amendments to the Act raise a number of questions for
companies engaging in joint ventures with competitors, so they must
be careful in the way they structure any joint
venture.

The new cartel amendments to the Trade Practices Act pose some
additional risks for structuring and successfully managing joint
ventures between competing organisations.

Joint ventures have become increasingly common in the
construction industry, permitting contractors who would be unable
to carry out large infrastructure projects on their own to pool
their resources and bid for projects together. Large projects such
as tollroads, water projects, railways, pipelines, oil and gas
projects and the like are commonly carried out as joint
ventures.

Cartel provisions

Since July 2009, the Act makes it a criminal offence to make or
"give effect to" a contract, arrangement or understanding
that contains a cartel provision.

Australia's new cartel laws are now amongst the toughest in
the world and carry severe penalties for companies and management
alike - liabilities which cannot be indemnified or insured
against.

A cartel provision is a provision of a
contract, arrangement or understanding between two
or more competitors which:

has the purpose, or has or is likely to have the effect, of
directly or indirectly fixing, controlling or maintaining
prices; or

has the purpose of:

preventing, restricting or limiting the production or supply of
goods and services or the capacity to supply services;

allocating customers or geographical areas of operation;
or

controlling the bidding by competing parties in a tender
process.

The phrase "contract, arrangement or understanding"
includes both formal and informal arrangements between competitors,
as well as unwritten "understandings" such as a "nod
and a wink" or other covert messages.

Who are my competitors for the purposes of the
Act?

In the application of the new cartel provisions, its important
to ask at the outset: are, or are the proposed consortium parties
likely to be, competitors in relation to the
specific project or services in question?

Will the parties otherwise be competitors for the services to be
offered by the proposed consortium or joint venture, which they
intend to form to bid for this project - and would they be
competitors for that project, in the absence of
their arrangement or agreement?

If yes, then the Act needs to be considered. If not, then cartel
risks may not arise.

For example, assume that two major construction companies have
fiercely competed against each other for a range of projects in the
past. Then tenders for a new major rail project are called
"the Great Inland Rail Link".

If the parties decide to team up together to bid in a new
consortium for the Great Inland Rail Link, the important question
under the Act is not whether they have been competitors in the
past, but whether, but for their formation of this new consortium,
is it likely in fact that otherwise they would be
competing against each other to win the rights to construct the
Great Inland Rail Link, either in their own right or with different
consortium partners.

If the answer is yes, then the new cartel provisions will need
to be considered.

The situation may be different, however, if parties would not be
able to bid for the work on their own because of the size of the
project, and therefore need to form a joint venture in order to
participate.

Sanctions and consequences of contravention

Liability under the new Act laws is strict and does not requires
any intent to reduce competition nor any awareness of
wrongdoing.

The penalty for breaching these provisions can be significant:
corporations may be liable for criminal fines or civil penalties
for up to the greater of:

$10 million, or

three times the value of the benefits obtained from the
activities, or

if the value cannot be determined, 10 percent of the
corporation's annual turnover.

For executives and others personally involved who had knowledge
of the elements of the offence, although no dishonest intent is
required, jail terms of up to 10 years can be imposed.

The Act also operates retrospectively to apply to cartel
provisions which were in place before the amendments to the Act
were passed, to the extent that a corporation gives effect to a
cartel provision.

Exception for joint ventures

The Act makes an exception for cartel
provisions relating to joint ventures,
but this exemption has been narrowly drafted and has been the
subject of criticism in a number of submissions made to the Senate
Committee.

In order for a cartel provision relating to a joint venture to
be exempt from the application of the new cartel
provisions, it must be established that:

the relevant cartel provision is for the purposes of a
joint venture for the production and/or supply of goods or
services; and

the provision is either:

contained in a contract; or

not contained in a contract, but contained in an arrangement or
understanding which all the parties intended and reasonably
believed to be a contract.

Accordingly, where the parties arrive at a cartel provision by
an informal arrangement or understanding for a joint venture which
would not (and was not intended to) constitute a legally binding
contract, the parties will risk falling foul of the civil and
criminal penalty provisions of the Act.

We examine some possible scenarios below.

Scenario 1 - strategic alliance

Corporations X and Y typically compete with each other for
construction projects but, in order to pool their resources, agree
to form a strategic alliance to bid for any water projects that may
be put to the market.

X and Y have agreed that they will only bid for water projects
through the joint venture and not individually or as part of
another consortium.

In order to take advantage of the joint venture exemption, the
parties would need to prove that the arrangement made was for the
purposes of a joint venture, and that the cartel provision was
contained in a contract. "Contract" is
not defined in the Act, but it is likely to be construed as meaning
a legally binding agreement, as opposed to an informal arrangement
or understanding which would not be enforceable in court.

If the arrangement between X and Y was not expressed in a
legally binding agreement, but was made on the basis of an informal
arrangement, X and Y may not be able to rely on the joint venture
defence.

Scenario 2 - sourcing of materials

As part of their strategic alliance arrangement, X and Y have
entered into a joint venture for the construction of a desalination
plant. They put out a tender for a subcontractor to supply precast
concrete to the joint venture. The joint venture receives a bid
from PrecastCo at $500/tonne.

Meanwhile X is carrying out a road project 20 kms away and has
received a bid from PrecastCo to supply precast concrete for
$475/tonne on that project.

X and Y inform PrecastCo that they will accept its bid for the
desalination plant if it reduces its price to $460/tonne and if
that same price is offered to X for its road project as well.

In this situation is unlikely that X and Y will be able to rely
on the joint venture exception because, from PrecastCo's
perspective, they are competing customers and the arrangement is
unlikely to be contained in a contract.

Joint ventures need to be careful about the level of separation
between a parent that may compete in some respects against the
joint venture, and the parent's representatives managing the
joint venture, so as not to share information and commercial
strategies as and when it suits them.

Related bodies corporate

An exemption that may be some of comfort to joint venture
parties that commonly enter into joint ventures with each other is
that the cartel provisions do not apply in relation to a contract,
arrangement or understanding if the only parties
to it are "related bodies corporate".

Points to think about

The amendments to the Act raise a number of questions for
companies engaging in joint ventures with competitors:

are the parties likely to be competitors in relation to the
project in the absence of their agreement?

is there a formal contract governing the joint venture
arrangement?

do the provisions of the contract refer to the particular
behaviour that may be considered as cartel-like behaviour under the
Act?

what is the level of separation between the parents of the
joint venture parties and are there any information sharing
arrangements between them?

does the company have an up-to-date compliance program to
ensure that staff are aware of the requirements of the Act?

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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